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Firm boundaries and financing with opportunistic stakeholder behaviour

Madhav S. Aney, Elie Appelbaum and Sanjay Banerji

Journal of Corporate Finance, 2019, vol. 56, issue C, 437-457

Abstract: We explore the impact of strategic behaviour of equity holders, debt holders and an opportunistic supplier of a critical input on the firm's capital structure, organisational design, and its outsourcing decision. We show that the supplier can trigger strategic bankruptcy even when the firm is solvent. Equity holders respond to this either by eliminating the supplier and producing the input in-house or by reducing their exposure to debt by using equity-financing. Both responses introduce inefficiency since input costs are higher with in-house production, and debt is cheaper than equity. We show that the equilibrium debt-equity ratio varies positively with cash-flow profitability and the marginal cost of the supplier's input, but negatively with the riskiness of the cash flow and the equity holders' in-house input production costs.

Keywords: Incomplete contracts; Opportunistic behaviour; Bankruptcy; Capital structure (search for similar items in EconPapers)
JEL-codes: D0 C7 G3 L2 (search for similar items in EconPapers)
Date: 2019
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Handle: RePEc:eee:corfin:v:56:y:2019:i:c:p:437-457